Canada bans foreign home buyers for two years, ignoring the actual root cause of the problem

The Canadian government will ban foreign homebuyers for two years, AP reported Monday.

The ban is aimed at “[c]urbing unfair practices that drive up the price of housing, in order to level the playing field for young and middle-class Canadians,” according to a news release from Trudeau’s office.

These are boogieman policies that have zero influence on the root cause. Foreign investors jump into the housing market because the current system ensures that the supply of housing is limited so it is an attractive way to park your wealth. The root cause is the system that is geared to keep houses always appreciating via supply constraints: aggressive zoning, discretionary permitting, NIMBYism.

Until we liberalise zoning, legalise building, and reject the idea that houses have to be appreciating assets, the issue will continue.

As it is often the case, politicians go for the headline with the highest electoral ROI, rather than tackle the real issues.

Will it have a significant and long lasting effect? Very likely not. But when examining the supply-demand equation, it’s painfully obvious to say “foreigners who don’t live here should not be allowed to buy residential housing”. It’s way, way easier than incentivising developers to build affordable housing and dealing with all of the in-place bureaucracies and regulations and all of the hard stuff that comes along with constructing new neighbourhoods and large residential buildings.

This is the most likely root cause and mostly driven by the most recent findings of some institutional research. The province of Ontario commissioned a “Housing Availability Task Force” to do a [report](…) spelling out the problem. They identified under-supply due to land use restrictions as the primary cause. The government ignored it and addressed secondary issues with lame bandaids in their June election platform.

They are conservatives, this “foreign buyer ban” bandaid is put in place by liberals. NDP and Greens offer nothing different. A quadri-partisan consensus on ignoring the root cause.

However we cannot ignore additional contributors: cheap money. It’s fuelling a lot of the meteoric price growth and making the housing market even more of a wild speculative one, where all that matters is the carrying costs and not any underlying fundamentals. This one is more of a worldwide problem, and a small country like Canada cannot use monetary policy to bludgeon the housing market back into reality without bludgeoning the rest of the economy with it.

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